Green Growth: Making it Happen

By Angel Gurría, OECD Secretary-General

07/02/2012 - Faced with low growth, high unemployment and weakened public finances countries need to pursue new sources of growth to put the global recovery back on track. Green growth can help. With the right policies to encourage innovation and stimulate new markets, it can boost productivity, spur growth and jobs, and change our behaviour as consumers. Green growth can also mobilise revenues in ways that do not undermine the economic recovery, while eliminating wasteful and environmentally harmful spending.

But what is new about green growth? Since the Rio Earth Summit twenty years ago, we have known that green and growth must go together. What is different now? Let me give you a simple answer: green growth is not about replacing sustainable development with a new paradigm. It is instead an approach that can contribute to the successful implementation of sustainable development through concrete policy action by governments and stakeholders. Green growth is a practical and flexible approach for making progress along the economic and environmental dimensions of sustainable development, while taking full account of the social consequences of greening the growth dynamics of our economies. Green growth strategies focus on ensuring that natural assets can deliver their full economic potential. That includes the provision of basic services – clean air and water – and the resilient biodiversity and ecosystems needed to support food production and human health.

Looking at the key environmental challenges we face, the need to revisit our patterns of consumption and production appears more urgent than ever. Indeed, the latest OECD projections paint a grim picture of the Earth in 2050 if we do not change our policies and behaviour to accommodate the expected 9 billion people the planet will have to support in the coming decades. Without new policies, the global energy mix will not change significantly between today and 2050, with the share of fossil fuel-based energy remaining at about 85% according to our projections. In this business-as-usual scenario, Green House Gas (GHG) emissions will increase by 50%, primarily driven by a projected 70% growth in CO2 emissions from energy use.

Demand for water is projected to increase globally by 55% by 2050. In 2050, an additional 2.3bn people, or over 40% of the world’s current population, are projected to be living in river basins characterised as under severe water stress. Water pollution from agriculture and urban sewage is projected to rise outside the OECD area, leading to increased harmful algal blooms and aquatic biodiversity loss. Terrestrial biodiversity is projected to decline globally by a further 10% by 2050.

The potential economic and social impacts of environmental degradation are particularly important for developing countries. They are the most vulnerable to climate change and tend to be more dependent than advanced economies on the exploitation of natural resource for economic growth. Green growth provides an opportunity for emerging-market economies and developing countries to leapfrog unsustainable and wasteful production and consumption patterns. While advanced economies are somewhat constrained by the path dependency of sunk capital, adequate financing and capacity would offer developing economies the opportunity to lay down the infrastructure and networks needed to support sustainable development.

Green growth strategies will need to be designed on the basis of country-specific circumstances. Each country will face different challenges and opportunities. Nevertheless, there are some common green growth policy ingredients:

First, putting a price on carbon emissions and other pollution can help steer economic activity away from carbon-intensive and polluting modes of production and consumption. Carbon taxes and emission trading schemes can raise much needed public revenues while helping offset reductions in taxes on labour or business income. Green tax reforms that use tax instruments to solve environmental problems should be a fundamental part of green growth strategies.

Phasing out environmentally harmful and inefficient subsidies also help to “get the prices right” while generating savings for public budgets. A prime example is support for fossil fuel production and use, which is estimated to have cost OECD governments about $45-75bn annually in recent years, and an additional $409bn for developing countries and emerging-market economies, according to estimates from the International Energy Agency.

Second, green innovation must become much more widespread and shared across national borders. Governments should fund relevant research, remove barriers to the early-stage commercial development of green technologies, strengthen related markets and accelerate international technology transfer. Changing consumer habits, technology and infrastructure is a long-term project. That said, power plants and other infrastructures have long operating lives, and there is a real risk that infrastructure choices made today will lock in pollution-intensive modes of production and consumption for decades to come. To minimise this risk, we must speed up the development and adoption of new greener technologies, while recognising the need for innovative business models, work patterns, city planning and means of transportation.

Third, the transition to a low-carbon and resource-efficient economy will require private sources of capital on a much larger scale. This is critical given the current state of government finances, but pension funds and other institutional investors can play a role in financing green growth initiatives. Pension funds in OECD countries currently receive annual contribution inflows of around $850bn and manage $28 trillion in assets. However, their asset allocation to green investments remains low, with less than 1% financing infrastructure projects, and an even smaller slice going to green infrastructure. Such projects can potentially offer the stable returns which institutional investors need, but uncertainty about environmental policies, new capital requirements and a lack of appropriate investment vehicles are major barriers to green investments. Governments and the financial industry need to ensure that attractive investment opportunities come through the pipeline by providing risk mitigation tools to cover regulatory uncertainty and issuing financing vehicles such as green bonds. Indeed, the UK government will launch a Green Investment Bank in 2012 to help structure products and boost investment in instruments such as energy efficiency-backed bonds.

Governments must ensure that investment in green growth is not hampered by protectionist interests. Investment policy must be coherent with environmental goals. Similarly, new environmental measures must observe key principles of international law, such as non-discrimination, which aim to create a level playing field for domestic and international investors alike. The OECD’s Freedom of Investment (FOI) Roundtable brings together 42 OECD and emerging-market economies to monitor policy developments in this area. Vigilance is required, although no overt discrimination against non-resident or foreign investors has been reported to date in relation to environmental policy.

Businesses are taking promising steps: the 'green race' is already on. OECD research shows that companies – across the globe and among different industries – have identified green goods and technologies as key future growth markets. Investors are looking to green infrastructure for long-term investment. New “sustainability champions” in emerging-market economies – from the BRICs to Kenya, Egypt and Costa Rica – are setting strong examples of how to turn successfully resource and other constraints into opportunities by innovating and mainstreaming sustainability considerations into their core business. But governments must help them by establishing clear and predictable policy frameworks that provide a level playing field and to support the necessary scaling-up of private financing. The OECD is working actively with member and partner governments, as well as the business sector, to identify appropriate framework conditions.

Government efforts to promote greener growth have intensified in recent years in the OECD area and beyond. The European Union's Growth Strategy for 2020, Korea's National Strategy and 5-year plan for Green Growth, the green development focus of China's 12th 5-year Plan and South Africa's New Growth Path and Green Economy Accord are just a few examples.

Most countries have introduced discrete policy measures that could be part of a wider green growth policy mix. But much more remains to be done, and green growth strategies must be integrated into core economic policies. Finance and economy ministries need to play a key role to make this happen. To smooth the transition, possible social impacts of green growth policies, especially for low-income households, must be addressed. Effective labour market and skills development policies can help to facilitate the re-allocation of workers from contracting to expanding sectors.

The Rio+20 Conference in June 2012 provides a window of opportunity for countries to renew their political commitment to sustainable development and to lay the foundations of a stronger, cleaner and fairer world. And this time we have to come up with concrete, workable solutions. Making green growth happen will be key to realising this vision. It is time to act.